If there is one type of stock which seems to be dazzling even in this choppy market, that is penny stock. In fact, nearly 200 penny stocks, which were never traded since 2000, have seen a resumption of trading on the BSE in the past one year and some of these stocks have appreciated between 100 per cent and 1000 per cent months after making a comeback, while a few of them hit the upper circuit successively over the period, according to a recent ET report.

For instance, shares of Surabhi Chemicals, which commenced trading after 16 years at Rs 2.52 last year, now quotes at Rs 37.40, an appreciation of 1,384 per cent, while SRK Inds, which recommenced trading after a gap of 12 years on February 13 last year, rose 888 per cent having hit the upper circuit 97 times since then. Similarly, stocks like Jolly Plastic and Parikh Herbals have given fabulous returns during the same period.

Impressive? Maybe. But there is more than meets the eye. Penny stocks, in fact, are high-risk stocks in which the chances of huge profit are usually counteracted by even bigger chances of huge loss. No wonder experts always advise investors, particularly risk-averse investors, to better keep off from such stocks.

"Given the lack of depth in Indian capital markets, investing in penny stocks is a bad option. Penny stocks are an attractive bargain for the investors for wrong reasons. The investors who prefer penny stocks think that they can get a large quantity of stocks for comparatively lesser prices. They feel that they can make substantial profit even with a small positive change in its price. But there is no value in having a large quantity of an essentially-bad investment," says Nitin B Vyakaranam, founder & CEO of financial planning portal Artha Yantra.

However, if you too are a braveheart and are unable to resist the lure of big money, you can take a chance at your own risk. But then it is better to know the tricks as well as the risks involved before putting your hard-earned money into such high-risk stocks:

Highly Volatile: Penny stocks are highly volatile. They tend to gain or lose value rapidly. The potential of increasing profit which attracts the investors also means that there is risk of losing the money as well.

Lack of Information: Corporations and companies that are traded in the major stock exchanges are required to release their information and account to their stockholders. "The same doesn't hold true for penny stocks. There is no accountability and with very little public information, one is left to act on one's gut feeling rather than relying on the fundamental information which generally defines the value of a stock," informs Vyakaranam.

Liquidity: Penny stocks are of highly illiquid nature due to their mode of operation. A large part of such stocks are owned by their promoters. They are willing to readily sell them. But once you think your stock is performing well and want to liquidate your positions, it's hard to find buyers at that price.

The inherent low liquidity feature of penny stocks also means that entering or exiting a position will cost you the charges involved. This diminishes the profit received by investing in penny stocks, if made.

Default Risk: Most of the companies offering penny stocks are new players in the market or the old players who are trying to restructure their broken operations. Both pose the risk of default if they fail to make substantial progress in their operations. Â

Keeping in view the wide range of risks associated with investing in penny stocks, a majority of financial advisors recommend investors to refrain from taking any positions in such investments.

"It is best that investors avoid penny stocks because they are excessively risky. They are very illiquid and the probability of losing money is far greater than the probability of making money. The dictum 'good things are not cheap, cheap things are not good' is applicable to stocks also," informs VK Vijayakumar, investment strategist, Geojit BNP Paribas Financial Services Ltd.

Retail investors, particularly the new entrants to the stock market, are easily lured by operators in these stocks with stories of quick bucks made in trading such stocks.

"However, investors should be guarded against such allurements. Investors who are lured into making investments in such stocks will be stuck with such stocks for months or even years since they will not be traded at all when the party is over. There is a good possibility that investors may lose their entire hard earned money invested in these stocks," warns Vijayakumar.

Thus, the best strategy would be to avoid these stocks. However, investors with a high-risk appetite may consider investing in penny stocks that have potential to become good quality small stocks or even mid caps in the medium to long term.

Good picks may emerge from penny stocks due to turn around in business fortune, cyclical upturn, sudden change in government's policy, change in management, takeover by existing good companies or by better management. But even in such cases, investors have to closely study the reasons for rally in such stocks before jumping on to the penny bandwagon.

"It is a fact that some penny stocks later turn out to be multi-baggers. But such stocks would be rare and therefore utmost caution has to be exercised while selecting them for investment," says Vijayakumar.